Canada: Security-Based Compensation Arrangements: On the Agenda for Your Next Securityholder Meeting

A recent Toronto Stock Exchange staff notice is a reminder that TSX-listed companies should amend their option, share purchase or other security-based compensation arrangements¹ to add a detailed amendment provision. Effective June 30, 2007, companies will not be permitted to amend plans that do not contain such a provision—even to make housekeeping changes—without securityholder approval. The notice also provides a framework for companies to consider using if they wish to have the power to extend options whose expiry date falls within a blackout period.

The date referred to above, June 30, 2007, is the last day of temporary relief provided by the TSX under an old staff notice that heralded major changes to section 613 of the Toronto Stock Exchange Company Manual and that took effect on January 1, 2005. Before these changes, securityholder approval was required for amendments to security-based compensation arrangements that the TSX considered material. This caused uncertainty because there could be differences of opinion between listed companies and the TSX over whether particular proposed amendments were material.

When the 2005 changes were implemented, most plans included only a general amendment provision that permitted amendments to the plans with merely board and TSX approvals, but did not require securityholder approval. Although the 2005 changes made these general amendment provisions inadequate, the TSX had provided temporary relief through the old staff notice. It identified the circumstances in which listed companies could—and could not—rely on the general amendment provisions in their plans to amend the plans without securityholder approval. The TSX will retract this old staff notice and strictly apply the requirements of section 613.

To avoid having to obtain securityholder approval for every amendment, TSX-listed companies should formulate a detailed amendment provision for their existing security-based compensation arrangements and seek securityholder approval of the provision at their next securityholder meeting that occurs before the June 30, 2007 deadline. The detailed amendment provision should contain examples of the kinds of amendments that the board of directors (or similar body) will be permitted to make without securityholder approval and those that will require securityholder approval. We expect that most companies will want to have the power to make housekeeping changes, accelerate vesting, effect early expiration and add cashless exercise features without securityholder approval. Companies may seek broader amending powers, although this could meet resistance. Even the broadest amending power will not permit repricing of insiders’ options without specific securityholder approval to the repricing.

Companies must obtain the TSX’s approval to their proposed new detailed amendment provision by sending the draft meeting materials to the TSX at least five days before the meeting materials are printed. The text of the whole plan should be provided to the TSX because it may require that full text of the plan be included in the meeting materials.

One of the changes in 2005 was to require disinterested securityholder approval to extend the term of options held by insiders. The TSX has recognized, however, that this rule unintentionally penalizes officers, directors and employees who, under their companies’ trading policies, are prohibited from exercising options during blackout periods. To remove this unintended penalty, the TSX has confirmed that it will permit listed companies to seek securityholder approval to issue options with, or to amend outstanding options to have, a conditional expiration date. Plans may provide that the term of an option may expire on the later of a fixed date and a date shortly after that date should the fixed date fall within, or immediately after, a blackout period.

The staff notice contains a number of detailed requirements that should be considered in this context. A copy of the staff notice (#2006-0001) can be obtain from the TSX’s website at

http://www.tsx.com/en/pdf/listingsNotices/2006-001.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.